Bull markets are built upon the bricks of skepticism and upon the backs of bears who are short the market and therefore will have to buy at some point to cover and/or chase the rallies. And, as I’ve been pointing out since July’s lows, 25% ago, the bears and shorts have been aggressive in fighting the boom, despite the fact that both the fundamentals and the macroeconomic (i.e., Fed’s relentless liquidity/money pumping) forces seem to point to much higher prices.

Nonetheless, it’s always instructive to work through the other side’s logic. As longtime readers know, I’m certainly willing to turn bearish when the cycles and markets get set up for bear markets, as they did in 2007 when I sold everything, and as I told readers at the time, moved my time and money to my media career instead of managing money.

Let’s walk out the most likely macro-economy cycle for the next year or two.

One of the points the bears I know and love keep telling me is that corporate profit margins are at all-time highs and that’s unsustainable. Excuse me while I gag myself with a spoon — I mean, this is one of the oldest and wrongest staples in the bear’s arsenal.

Corporate profit margins have been setting new highs for my entire investing career, over the last 15 to 20 years. Those boosted margins have been in large part attributable to our economy having moved from a manufacturing-based economy to a service-based economy. Then in the last 10 to 15 years, that service-based economy turned into a information-based economy and that’s helped push margins even further.

But any discussion of corporate margins and their future direction is completely misguided without focusing on the incredible corporate-welfare programs, such as the government-funded, but corporate-administered health-care expansion policies and especially the bailouts and Fed emergency-liquidity policies. We’re talking trillions of dollars in direct and policy-directed corporate-welfare programs that have been created in the last couple years.

All that government help is indeed very likely to help its targets: the same corporations whose profit margins we’re discussing right here right now. I think it’s incumbent upon all of us as patriots to fight this trend of endless corporate-welfare programs with our votes, but as investors, we need to profit from it. That means betting on corporate margins’ continued expansion.

One of the main reasons I’ve created Revolution Investing is because it’s now so important for us as investors and savers to gauge the impact of these policies and their consequences, both intended and unintended. At some point, when it catches on to the same trends that we’re seeing here at Revolution Investing, the Fed’s going to have to start raising rates. There’s an old saying on Wall Street that you “can’t fight the Fed,” but it’s dead wrong. For the last 15 years, you always want to buy when the Fed is getting done lowering rates and sticking around til the Fed starts to lower rates.

In about 1994, the Fed stopped lowering rates and never went that low again for many years, as the overall trend in rates was higher. Meanwhile, the stock market went into a huge bubble by the year 2000. By 2001, the Fed started dropping rates and the markets literally crashed over the next couple years. By 2003, the Fed was done lowering rates and we once again went into an environment of rising interest rates — and the stock market doubled over the next three years.

By 2010, we’re done lowering rates and easing. We’ll likely see the overall trend in interest rates rise over the next few years. And I do think the most likely scenario is, indeed, for a booming or even a bubble in the stock market again.

One of the best ways to set our portfolios up to profit from this analysis is exactly what I wrote in last week’s Revolution Investing about how I’d use some long-dated calls in some of the cheapest, lowest-beta tech names such as Cisco Systems Inc. Read column on Cody’s “favorite trade.”

Be vigilant, be careful, be flexible. I’ll see you next week … and next year!

This copy is for your personal, non-commercial use only. Distribution and use of
this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones
Reprints at 1-800-843-0008 or visit